Driven by a series of temporary positive factors, the annualized growth rate of the US gross domestic product (GDP) in the third quarter is likely to be as high as close to 5%, with consensus expecting it to reach 4.6%. Bloomberg economist Elizabeth Winger said on Wednesday that the US Bureau of Economic Analysis will release the initial real GDP for the third quarter on Thursday, which is expected to show strong consumer spending but slower growth in corporate investment.
Winger said, "The frenzy of summer tourism and entertainment consumption has driven real GDP growth to an unsustainable pace in the third quarter. The Federal Reserve's tightening cycle takes time to affect the real economy, but we believe that the increase in mortgage rates, credit card debt, and commercial loan default rates will affect economic growth in the fourth quarter
The US economy is expected to be hot in the third quarter: consumer spending has become a "locomotive"
The real GDP growth rate of nearly 5% in the third quarter of the United States will mark an accelerated growth of the US economy in an already strong year, with GDP growth of at least 2% in each of the past four quarters. Moreover, the Atlanta Federal Reserve's real-time economic growth tracking data, GDPNow, shows that growth is expected to reach as high as 5.4% in the third quarter, with more than half (2.77 percentage points) coming from consumer spending. Exports are expected to contribute approximately 1 percentage point, while inventory is expected to contribute 0.7 percentage points.
However, Winger pointed out that a large part of this strong momentum comes from temporary factors - the tour of Taylor Swift and Beyonce, as well as the spending of the summer blockbusters "Barbie" and "Oppenheimer", boosted spending in the third quarter, as well as temporary factors that may not necessarily reflect potential strong momentum, such as a decline in imports and an increase in retail inventory.
These superstar tours and blockbusters are expected to contribute $8.5 billion to US economic growth in the third quarter. These two artists' nearly 50 US tour concerts may add $5.4 billion to the US GDP, while the movies "Barbie" and "Oppenheimer" are expected to increase consumer spending and international ticket sales by approximately $3.1 billion in exports. Overall, this will increase the actual personal consumption expenditure and GDP of the United States by 0.7 and 0.5 percentage points respectively in the third quarter.
Yelena Shulyatyeva, senior US economist at BNP Paribas, also said, "This seems to be largely driven by consumer spending on non essential goods and services. We believe this is only a temporary boost
The economic outlook in the fourth quarter of the United States is bleak: the good news fades and the bad news emerges
The US economy may not experience such a boost in the fourth quarter. Bloomberg Economics predicts that the US economy will experience a mild recession in the fourth quarter. Secondly, some economists believe that after dragging down GDP for more than two years, real estate boosted GDP in the third quarter. However, in recent weeks, against the backdrop of rising US treasury bond bond yields, mortgage interest rates have risen again, which may kill the recovery of residential investment. Diane Swonk, Chief Economist at KPMG, said: "This is a brief rebound and has begun to reverse
The US economy will also face other unfavorable factors in the fourth quarter that have not been encountered before, including the resumption of student loans after the suspension of the epidemic, and the expansion of the strike by car workers. Other risks include the possibility of a US federal government shutdown next month and the threat of a broader war in the Middle East.
Former President Trump's senior White House economist, LaVorgna, also believes that rising borrowing costs and a generally expected decline in demand for high priced goods may ultimately begin to affect demand indicators. LaVorgna said, "The income data shows that the economy is much weaker, and for me, there are many signs that although we are excited about the third quarter, this is definitely the last growth we have seen in a period of time
The Fed's Fish and Bear's Feet: Reducing Inflation vs Protecting the Economy
Despite slowing inflation, the strong economy has left Federal Reserve Chairman Powell and his colleagues in a dilemma. Since March 2022, the Federal Reserve has been actively raising interest rates, attempting to curb inflation by suppressing demand while avoiding economic recession. With the COVID-19 and the Russia Ukraine war reducing the interference to the global supply chain, inflation has cooled down. But despite the efforts of the Federal Reserve, the domestic demand of the United States is still strong.
The strong job market is still driving consumer spending, and business activities are also gaining momentum. Powell stated last week that other signs of sustained strong economic growth "may pose further risks to inflation and may justify further tightening of monetary policy". Powell hinted that policymakers may keep interest rates unchanged at next week's meeting while opening the door for further rate hikes in the future.
If the economic growth data cannot cool down quickly, he may not have much patience, "said Bruce Kasman, Chief Economist of JPMorgan Chase
Before inflation returns to its target level, the Federal Reserve has now revealed its determination to maintain monetary policy at restrictive levels for a longer period of time. But the accompanying side effect may be an economic recession. Since the beginning of 2022, the market has often seen this view: due to the lagging impact of interest rate hikes, economic recession is almost inevitable. Winger said, "The Federal Reserve has cumulatively raised its benchmark interest rate by 5.25 percentage points to slow economic growth, and some of the long-term and variable lags of monetary policy on the economy may not have fully played a role
For example, since mid July 2022, the bond market has been sending strong signals that an economic recession is imminent. Since then, the yield of two-year US treasury bond has exceeded that of 10-year US treasury bond. This phenomenon is called yield curve inversion, and has never failed to predict the upcoming recession. Nowadays, this inverted trend has sharply weakened, and the curve has almost flattened again - this is also a textbook signal that an economic recession is approaching. This is because after hanging upside down, the market will eventually begin to digest expectations of future growth slowdown or negative growth through lower yields.
Quincy Krosby, Chief Global Strategist at LPL Financial, said, "The market is sending a message that a recession is coming and the Federal Reserve will have to cut interest rates. What they want to do is plan an economic slowdown, but keep the labor market intact. Historically, this has been very difficult
Therefore, driven by temporary factors such as the "explosive" growth of consumer spending, the fiery growth of US GDP in the third quarter may not have a significant impact on the Federal Reserve, and Federal Reserve officials may still choose to observe the impact of policies. Because as the effect of interest rate hikes gradually permeates the economy, consumers may soon feel the impact of high interest rates more clearly. Moreover, the data for the third quarter may also be considered relatively lagging, and if the data for the following fourth quarter remains hot, the Federal Reserve may only take it seriously.